Northern Trust Corporation Reports Third Quarter Net Income of $206.5 Million, Earnings Per Common S

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Northern Trust Corporation Reports Third Quarter Net Income of $206.5 Million, Earnings Per Common Share of $0.84.

CHICAGO--(BUSINESS WIRE)-- Northern Trust Corporation today reported third quarter net income per diluted common share of $0.84, up from $0.73 in the third quarter of 2012 and $0.78 in the second quarter of 2013. Net income was $206.5 million in the current quarter, an increase of 15% from $178.8 million in the prior year third quarter, and up 8% from $191.1 million in the prior quarter. Return on average common equity was 10.6% in the current quarter, compared to 9.6% in the prior year quarter and 10.0% in the prior quarter.

The current quarter includes a $32.6 million pre-tax gain on the sale of an office building property. Excluding the current quarter gain, net income per diluted common share, net income and return on average common equity would have been $0.76, $186.2 million, and 9.6%, respectively.


Frederick H. Waddell, Chairman and Chief Executive Officer, commented, "Revenue growth in the third quarter reflects a solid increase in trust, investment and other servicing fees. Assets under custody and under management increased 10% and 13%, respectively, versus last year, reflecting our success in winning new clients and serving existing clients, as well as higher equity markets. Expenses increased as a result of the growth in our business, including recent office openings in Frankfurt, Germany and Riyadh, Saudi Arabia, and continued investment to support technology initiatives and a growing set of regulatory and compliance requirements for our clients."

THIRD QUARTER 2013 PERFORMANCE VS. THIRD QUARTER 2012

Net income per common share in the third quarter of 2013 was $0.84 compared to $0.73 per common share in the third quarter of 2012. Net income for the current quarter was $206.5 million, up $27.7 million, or 15%, from $178.8 million in the prior year quarter.

Consolidated revenue of $1.05 billion in the current quarter was up $74.7 million, or 8%, from $972.5 million in the prior year quarter. Noninterest income, which represented 77% of revenue, increased $83.3 million, or 11%, to $810.2 million from the prior year quarter's $726.9 million, primarily reflecting higher trust, investment and other servicing fees; other operating income; and foreign exchange trading income. Net interest income for the quarter on a fully taxable equivalent (FTE) basis decreased $12.1 million, or 5%, to $244.8 million compared to $256.9 million in the prior year quarter, primarily due to a decrease in the net interest margin.

Trust, investment and other servicing fees were $648.0 million in the current quarter, up $46.1 million, or 8%, from $601.9 million in the prior year quarter. The increase primarily reflects new business and the favorable impact of equity markets on fees, partially offset by higher waived fees on money market mutual funds.

Assets under custody and assets under management are the primary drivers of our trust, investment and other servicing fees. The following table provides the assets under custody and assets under management of Northern Trust's Corporate & Institutional Services (C&IS) and Wealth Management business units.*

 
 September 30, June 30, September 30, % Change % Change
($ In Billions) 2013 2013 2012 Q3-13/Q2-13 Q3-13/Q3-12
Assets Under Custody
Corporate & Institutional$4,766.5$4,538.9$4,331.95%10%
Wealth Management  470.5  452.6  429.5 4  10 
Total Assets Under Custody $5,237.0 $4,991.5 $4,761.4 5% 10%
 
Assets Under Management
Corporate & Institutional$634.6$600.5$565.66%12%
Wealth Management  211.6  202.5  184.1 4  15 
Total Assets Under Management $846.2 $803.0 $749.7 5% 13%

C&IS trust, investment and other servicing fees increased $25.4 million, or 8%, to $359.8 million in the current quarter from the prior year quarter's $334.4 million.

 
 Q3 Q3 

Change Q3 2013

($ In Millions) 2013 2012 

from Q3 2012

C&IS Trust, Investment and Other Servicing Fees 
Custody and Fund Administration$239.4$214.4$25.012%
Investment Management71.373.2(1.9)(3)
Securities Lending22.723.8(1.1)(5)
Other  26.4  23.0  3.4  15  
Total $359.8 $334.4 $25.4  8 %

Custody and fund administration fees, the largest component of C&IS fees, increased 12%, primarily driven by favorable equity markets and new business. C&IS investment management fees decreased 3%, primarily due to higher waived fees in money market mutual funds, partially offset by favorable equity markets and new business. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $15.3 million in the current quarter, compared to waived fees of $6.5 million in the prior year quarter. Securities lending revenue decreased 5%, primarily reflecting lower spreads in the current quarter, partially offset by higher volumes.

Trust, investment and other servicing fees in Wealth Management totaled $288.2 million in the current quarter, increasing $20.7 million, or 8%, from $267.5 million in the prior year quarter. The increased fees in the current quarter are primarily due to new business and the favorable impact of equity markets on fees, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in Wealth Management totaled $17.1 million in the current quarter compared with $10.3 million in the prior year quarter.

Foreign exchange trading income totaled $62.8 million, up $18.8 million, or 43%, compared with $44.0 million in the prior year quarter. The current quarter increase is attributable to higher currency market volatility and trading volumes compared to the prior year quarter.

Other operating income totaled $67.2 million in the current quarter, up $20.6 million, or 44%, from $46.6 million in the prior year quarter. The current quarter includes the $32.6 million pre-tax gain on the sale of an office building property. The prior year quarter included a $5.3 million gain on foreign exchange contracts related to hedges of certain investments in foreign currency denominated subsidiaries. Excluding these current and prior year quarter gains, other operating income decreased $6.7 million.

Net investment security losses totaled $2.2 million, resulting from realized losses on the sale of securities in the current quarter.

Net interest income for the quarter on an FTE basis totaled $244.8 million, down $12.1 million, or 5%, compared to $256.9 million in the prior year quarter. The decrease is primarily the result of a decline in the net interest margin to 1.14% from 1.21% in the prior year quarter, partially offset by higher levels of average earning assets. The decline in the net interest margin primarily reflects lower yields on earning assets, partially offset by a lower cost of interest-related funds due to lower short-term interest rates. Average earning assets for the quarter were $85.5 billion, up $1.0 billion, or 1%, from $84.5 billion in the prior year quarter.

The provision for credit losses was $5.0 million in the current quarter compared to $10.0 million in the prior year quarter. Net charge-offs totaled $8.3 million for the current quarter resulting from $11.6 million of charge-offs and $3.3 million of recoveries, compared to $11.9 million of net charge-offs in the prior year quarter resulting from $16.3 million of charge-offs and $4.4 million of recoveries. Nonperforming assets declined slightly from the prior year quarter. Residential real estate loans and commercial real estate loans accounted for 70% and 20%, respectively, of total nonperforming loans and leases at September 30, 2013.

The table below provides information regarding nonperforming assets, the allowance for credit losses, and associated ratios.

       
 September 30, June 30, September 30,
($ In Millions) 2013 2013 2012
 
Nonperforming Assets
Nonperforming Loans and Leases$270.1$266.7$269.0
Other Real Estate Owned  13.9   14.5   20.6 
Total Nonperforming Assets  284.0   281.2   289.6 
 
Allowance for Credit Losses
Allowance for Credit Losses Assigned to:
Loans and Leases287.2290.4298.6
Unfunded Loan Commitments and Standby Letters of Credit  30.3   30.3   29.4 
Total Allowance for Credit Losses $317.5  $320.7  $328.0 
 
Ratios

Nonperforming Loans and Leases to Total Loans and Leases

0.93%0.93%0.91%

Allowance for Credit Losses Assigned to Loans and Leases to Total Loans and Leases

0.99%1.01%1.01%

Allowance for Credit Losses Assigned to Loans and Leases to Nonperforming Loans and Leases

1.1x1.1x1.1x
          

Noninterest expense totaled $740.7 million in the current quarter, up $44.3 million, or 6%, from $696.4 million in the prior year quarter, primarily reflecting higher outside services, equipment and software, and compensation expense.

Compensation expense, the largest component of noninterest expense, equaled $324.6 million, up $8.9 million, or 3%, from $315.7 million in the prior year quarter, attributable to higher staff levels. Staff on a full-time equivalent basis at September 30, 2013 totaled approximately 14,600, up 3% from a year ago. Employee benefit expense equaled $63.5 million, up 4% from $61.3 million in the prior year quarter.

Expense associated with outside services totaled $145.9 million, up $19.3 million, or 15%, from $126.6 million in the prior year quarter. The current quarter increase is primarily due to higher consulting and technical services expense, including costs associated with a growing set of regulatory and compliance requirements.

Equipment and software expense totaled $95.5 million, up $9.5 million, or 11%, from $86.0 million in the prior year quarter. The current quarter includes higher software amortization associated with the continued investment in technology related assets.

Occupancy expense equaled $43.3 million, relatively unchanged from $43.8 million in the prior year quarter. Other operating expense totaled $67.9 million compared with $63.0 million in the prior year quarter, an increase of 8%, primarily reflecting increases in various miscellaneous expense categories.

Income tax expense was $95.0 million in the current quarter, representing an effective tax rate of 31.5%, and $87.3 million in the prior year quarter, representing an effective tax rate of 32.8%.

THIRD QUARTER 2013 PERFORMANCE VS. SECOND QUARTER 2013

Net income per common share was $0.84 in the current quarter, compared with $0.78 in the second quarter of 2013. Net income for the current quarter totaled $206.5 million, up $15.4 million, or 8%, from $191.1 million in the prior quarter.

Consolidated revenue of $1.05 billion for the current quarter was up $26.7 million, or 3%, from $1.02 billion in the prior quarter. Noninterest income increased $9.8 million, or 1%, to $810.2 million from the prior quarter's $800.4 million, primarily attributable to higher other operating income, partially offset by lower trust, investment and other servicing fees and foreign exchange trading income. Net interest income for the current quarter on an FTE basis increased $16.8 million, or 7%, to $244.8 million from $228.0 million in the prior quarter, due to an increase in the net interest margin and higher levels of average earning assets.

Trust, investment and other servicing fees totaled $648.0 million in the current quarter, down $9.3 million, or 1%, from $657.3 million in the prior quarter.

C&IS trust, investment and other servicing fees totaled $359.8 million in the current quarter, down 1%, from $364.2 million in the prior quarter.

 
 Q3 Q2 

Change Q3 2013

($ In Millions) 2013 2013 

from Q2 2013

C&IS Trust, Investment and Other Servicing Fees 
Custody and Fund Administration$239.4$234.4$5.02%
Investment Management71.373.9(2.6)(4)
Securities Lending22.731.1(8.4)(27)
Other  26.4  24.8  1.6  6  
Total $359.8 $364.2 $(4.4) (1)%

C&IS custody and fund administration fees increased 2%, primarily driven by new business. Investment management fees decreased 4%, primarily due to higher waived fees on money market mutual funds. Money market mutual fund fee waivers, attributable to the low short-term interest rates, totaled $15.3 million in C&IS in the current quarter, up from $9.8 million in the prior quarter. Securities lending revenue decreased 27%, reflecting lower spreads, primarily due to the international dividend season that occurred in the prior quarter.

Wealth Management trust, investment and other servicing fees were $288.2 million, down 2% from $293.1 million in the prior quarter, primarily due to higher waived fees on money market mutual funds. Money market mutual fund fee waivers in Wealth Management totaled $17.1 million in the current quarter, compared to $12.9 million in the prior quarter.

Foreign exchange trading income decreased $8.5 million, or 12%, to $62.8 million compared to $71.3 million in the prior quarter. The current quarter decrease reflects lower currency market volatility and trading volumes.

Other operating income in the current quarter totaled $67.2 million, up $30.9 million, or 85%, from $36.3 million in the prior quarter. The increase is primarily attributable to the current quarter $32.6 million pre-tax gain on the sale of an office building property.

Net interest income on an FTE basis in the current quarter totaled $244.8 million, up $16.8 million, or 7%, compared to $228.0 million in the prior quarter. The increase is primarily the result of an increase in the net interest margin as well as higher levels of average earning assets. The net interest margin increased to 1.14% in the current quarter from 1.10% in the prior quarter, reflecting higher yields on earning assets and a lower cost of interest-related funds. Average earning assets totaled $85.5 billion in the current quarter, up $2.4 billion compared to $83.1 billion in the prior quarter.

The provision for credit losses totaled $5.0 million in both the current quarter and the prior quarter. Net charge-offs totaled $8.3 million for the current quarter resulting from $11.6 million of charge-offs and $3.3 million of recoveries, compared to $8.1 million of net charge-offs in the prior quarter resulting from $15.6 million of charge-offs and $7.5 million of recoveries. Nonperforming assets increased slightly as compared to the prior quarter.

Noninterest expense totaled $740.7 million in the current quarter, up $11.0 million, or 2% from $729.7 million in the prior quarter.

Compensation expense totaled $324.6 million for the current quarter, down 1% from $326.9 million in the prior quarter. Employee benefit expense totaled $63.5 million for the current quarter, down 1% from $64.2 million in the prior quarter.

Expense for outside services totaled $145.9 million, an increase of $9.7 million, or 7%, compared to $136.2 million in the prior quarter. The current quarter increase is primarily due to higher consulting and technical services expense, including costs associated with a growing set of regulatory and compliance requirements.

Equipment and software expense totaled $95.5 million in the current quarter, up 4%, from $92.1 million in the prior quarter. The increase is primarily attributable to higher levels of software amortization and support costs associated with the continued investment in technology related assets.

Occupancy expense totaled $43.3 million, relatively unchanged from $43.5 million in the prior quarter. Other operating expense totaled $67.9 million, up 1% from $66.8 million in the prior quarter.

Total income tax expense was $95.0 million for the current quarter, representing an effective tax rate of 31.5%. Income tax expense was $94.7 million in the prior quarter, representing an effective tax rate of 33.1%.

STOCKHOLDERS' EQUITY

Total stockholders' equity averaged $7.7 billion, up 4% from the prior year quarter's average of $7.4 billion. The increase is primarily attributable to earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation's share buyback program. During the three and nine months ended September 30, 2013, the Corporation repurchased 1,715,921 shares at a cost of $97.3 million ($56.73 average price per share) and 3,400,613 shares at a cost of $187.1 million ($55.02 average price per share), respectively. The Corporation's common stock repurchase authorization was replaced in April of 2013. The stock repurchase authorization remaining after September 30, 2013 is 10.0 million shares.

As reflected in the table below, the risk-based capital ratios of Northern Trust and its principal subsidiary bank, The Northern Trust Company, remained strong at September 30, 2013, with all ratios exceeding the U.S. regulatory requirements for classification as "well capitalized" institutions.

       
  September 30, 2013 June 30, 2013 September 30, 2012
 Tier 1 Total Leverage Tier 1 Total Leverage Tier 1 Total Leverage
  Capital Capital Ratio Capital Capital Ratio Capital Capital Ratio
Northern Trust Corporation13.6%14.9%8.3%13.1%14.4%8.4%12.8%14.3%8.1%
The Northern Trust Company11.7%13.3%7.2%11.3%13.0%7.3%11.8%13.8%7.5%

Minimum to Qualify as Well Capitalized

 6.0% 10.0% 5.0% 6.0% 10.0% 5.0% 6.0% 10.0% 5.0%

The following table provides the Corporation's ratios of tier 1 capital and of tier 1 common equity to risk-weighted assets, as well as a reconciliation of tier 1 capital calculated in accordance with applicable U.S. regulatory requirements and GAAP to tier 1 common equity.

       
 September 30, June 30, September 30,
($ In Millions) 2013 2013 2012
 
Ratios
Tier 1 Capital13.6%13.1%12.8%
Tier 1 Common Equity13.1%12.6%12.3%
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